What is a Buyer's Premium?

In auctions, a buyer's premium is a charge that is added to the hammer price of an auction item. Whoever wins the bid is required to pay the hammer price and the percentage of that price called for by the buyer's premium. This hammer price is always charged by the auctioneer added to the seller's commission. However, it should be noted that one hundred percent of the buyer's premium is always retained by the auction house and mostly not shared with the item's consignor.

An auctioneer acts as the agent of the seller who employs him or her. And this auctioneer must always act in good faith and advance the interests of the seller and also conduct the sale by following the seller's instruction which has to be carried out to maintain the relationship established.

Most of the major auction houses have levied the buyer's premium over the years, distinctively in fine arts auctions, with some percentages ranging from 10% -30%. In many European countries, in real estate auctions, if the buyer's premium is charged at all, it is much less than 2%-2.5%. Recently in the United Kingdom, however, many foreclosure properties have been offered without fee to the consignor but with 10% of the buyer's premium.

The buyer's premium characteristics of auction houses is a necessary contribution to the costs of the administrative process, while some which are in the auction buying environment see it as an unreasonable additional charge. Although a few auction houses may market themselves as not charging a premium, to gain favor with customers, such is now very rare and the buyer's premium is commonplace with auction houses. However, the small independent auctioneer in the United States has been slow to adopt the buyer's premium.

The amount of the buyer's premium will normally be outlined carefully in the auction house terms and conditions, in the United Kingdom properties, it is mentioned in the Royal Institute Of Chartered Surveyors (RICS) common auction conditions or included in the special condition for the lot.

In the continent of Europe, the buyer's premium may also be subjected to the Value Added Tax (VAT). On the other hand, in the United States, most states require sales tax to be calculated first on the amount of the premium since it is a component of the price which is being paid for the item.